Factor Company is planning to add a new product to its line. To manufacture this
ID: 2425984 • Letter: F
Question
Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $491,000 cost with an expected four-year life and a $15,000 salvage value. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Expected annual sales of new product $ 1,960,000 Expected annual costs of new product Direct materials 490,000 Direct labor 676,000 Overhead (excluding straight-line depreciation on new machine) 335,000 Selling and administrative expenses 141,000 Income taxes 40 % Required:
Compute the net present value for this machine using a discount rate of 6% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset’s life.) (Do not round intermediate calculations.)
Compute the net present value for this machine using a discount rate of 6% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset’s life.) (Do not round intermediate calculations.)
Explanation / Answer
Cash flow 119,400 + 119,000 depreciation = 238,400
Net present value
Sales revenue $1,960,000 less:operating costs Direct materials $490,000 Direct labor 676,000 Overhead 335,000 Selling and administrative expense 141,000 Depreciation exepense(491,000-15000)/4 119,000 (1,761,000) income before tax 199,000 less:Income tax @40% (79,600) Net income 119,400Related Questions
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